Severing the Fracking Tax Break

Mar 13, 2015

Should Louisiana repeal its 20-year-old severance tax exemption for horizontal wells? LSU economist Jim Richardson believes the time for that particular economic incentive has passed.

“In 1994, nobody knew how to do horizontal drilling. Today, everybody knows how to do horizontal drilling,” Richardson says of the tax break implemented to encourage what was then a new technology.

Louisiana Mid-Continent Oil and Gas Association president Chris John says the severance tax exemption for fracking wells keeps Louisiana in the shale production game.

“If it were to be repealed, I believe that would un-level the playing field that we have among other states,” John says.

Mississippi has a similar tax break in place. Texas does not.

In Louisiana, horizontal wells don’t pay severance tax for the first two years of production, or until the drilling company recoups the cost of the well — whichever comes first. John says while horizontal wells do pay off big when they hit, they are much more expensive to drill. And they have a shorter production life than vertical wells.

“The longevity of the recoverable natural resources is much shorter than a conventional well,” John says in justification of the severance tax exemption.

The wells are drilled at an angle to a depth of 12-15,000 feet, then are drilled horizontally through the brittle layered rock known as shale. Hydraulic fracturing (fracking) breaks the oil or gas out of the shale in a big burst. The well produces about half its total product in the first year, and in 3 to 5 years, the well is done. So when the wells are most profitable, the state doesn’t see a dime of severance tax.

“A couple of years ago, it cost us $250-million,” Richardson says, referring to the big fracking boom in northwest Louisiana’s Haynesville Shale.

Richardson says the severance tax exemption will cost the state far more when drilling begins in earnest in the Tuscaloosa Marine Shale. That massive oil deposit runs across the entire lower third of the state.

“They’re saying that you have almost nine billion barrels of oil there,” Richardson says of the geologists’ predictions.

And, he adds, the severance tax exemption will mean Louisiana won’t get revenue it desperately needs.

“You’re talking about six to seven billion dollars. You’re not talking about petty change.”